American Eagle's Plan for Success

This Wednesday before the opening bell, American Eagle will report fourth-quarter earnings, and Wall Street is looking for very good things. The stock was up more than 4% yesterday on rumors and whispers -- you know, the things that make Wall Street tick. The company updated its guidance in January and is forecasting earnings per share of $0.54 to $0.56 based on mid-single-digit comparable-sales growth. Through early January, comparable sales had increased 5%, when online sales were included -- 1% without including online.

Analysts expectations are ostensibly in line with the company's, with the Street predicting $0.55 per share. Yesterday's run-up tells a slightly different story, though. That's likely fired by a suspicion that American Eagle is going to continue matching the turnaround that Gap has undertaken over the past year. Like Gap, American Eagle has redoubled its focus on its core brand, and started to see some success. But will the early turnaround go to its head, or is there more in store for investors?

Location, location, brandOver the last few years, retailers have been focusing on international expansion to help increase sales and income. That expansion has largely been focused on Asia -- specifically on China. The drive was the growth of the Chinese middle class. American Eagle dodged that potentially dangerous bullet and built its first international store in Dubai. Since the company waited so long to move outside of North America, it still has a relatively low international store count. Of its 1,255 stores, only 69 are international, and those are licensed locations.

In early 2012, the company realized that something had to change in the U.S. before it could make a big move internationally. That realization led to American Eagle focusing on its core brand and playing to its strengths. At that point, it was operating underperforming stores and spending more cash that it should have been. To rectify that, the company went on a pruning spree, closing underperforming stores and sinking resources into its online presence to drive cheaper direct sales. Later, the whole turnaround was codified and now American Eagle has a real plan in place.

Through fiscal 2015, the focus is going to be on making the strengths that the company already has even stronger -- brand, U.S. stores, and online. Starting in fiscal 2014, international growth and omnichannel will begin to play a larger role. Even though those are exciting areas, the real story has been with the company's core turnaround, and the value that it's bringing to investors.

The Gap modelAmerican Eagle is walking right alongside Gap in its turnaround. Over the last year, both companies have seen an increase in comparable sales and earnings. That's helped investors' sentiment, and share at both companies are up close to 50% over the last 12 months. The key to that success has been an unwavering focus on the clothing that made the brands what they are. Gap has increased its products' quality and cut its shipping times, enabling it to regain its spot as a trend leader.

American Eagle has used its denim business to draw customers in the door, and then convert those visits to bigger sales and average transactions. That's allowed it to move past weaker competitors like Aeropostale . Over the last 12 months, Areopostale's stock has fallen 25% on weak sales and plummeting comparable sales. What American Eagle is doing right is focusing on its strength, something that Aeropostale has been unable to do. In its last call, Aeropostale admitted that all it could do was chase fashion -- in fact it seemed happy to do so. CEO Thomas Johnson said that the company would "continue to invest in and enhance our processes that will enable us to chase fashion and increase our overall speed to market."

The bottom lineWhat American Eagle and Gap understand is that customers respond to strong brands more than they respond to the latest thing. While it's certainly important to have trendy clothing in-store, it's more important to have a name that's synonymous with a type of fashion. On top of that, American Eagle has a clearly defined and conservative plan for renewing its brand. So far, it's performed admirably and there's no reason to think that the growth is going to stop anytime soon.

Tomorrow, I want to hear that comparable sales inched up a point or two at the end of the quarter. That should push earnings per share past the $0.55 that the market is expecting. Even more than I want to see that growth, I want to hear how the next 12 months are going to build and improve on the previous 12. American Eagle should start talking about omnichannel and international, and I want those discussions to be in line with the strong, well-executed plan that it had for its brand. Investors should be very optimistic about American Eagle this year.

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